How to protect your 401(k) plan’s fiduciary under new regulations

Charles Bernier, President, ECBM Insurance Brokers and Consultants

You may not have given much thought to your company’s 401(k) plan since establishing it years ago. And it is likely that you have a third party service provider, such as a bank or financial institution, doing the administrative work.
But a new ruling by the Employee Benefits Security Administration (EBSA) — which goes into effect July 1 — is forcing in-house retirement plan administrators to stand up and take notice. The new regulation, called the Final Sponsor Fee Disclosure Regulation under the Employee Retirement Income Security Act, could put your company’s plan administrators in serious financial jeopardy, says Charles Bernier, president of ECBM Insurance Brokers and Consultants.
Company plan administrators, who are fiduciaries, have always been personally liable if they do not fulfill their responsibilities. But this new rule, which aims to rein in third-party service provider fees, has the potential to bring financial calamity to plan administrators who are unaware that they, not the service provider, carry all of the liability for missteps.
“Many company plan fiduciaries — who can be the owner, a financial or human resources officer or director — don’t realize that they could lose their homes over this,” says Bernier.
Smart Business spoke with Bernier about the new rule and how to protect your company’s 401(k) plan fiduciary.

What does this new regulation say?

The Final Sponsor Fee Disclosure Regulation, or 408(b)(2), mandates full disclosure of all fees and compensation, direct and indirect, that are charged by 401(k) service providers. Prior to the regulation, the onus was on the company’s plan fiduciary, or trustee, to find out the service provider’s fees and compensation. Before, if a fiduciary didn’t ask, the service provider didn’t have to tell.
In this mandated disclosure, a service provider also has to state if it is a fiduciary for the plan, or whether it’s not. This can come as a surprise to plan administrators who may have assumed, incorrectly, that their service provider is also the fiduciary.

Do many businesses incorrectly make this assumption?

According to the Department of Labor, there are 483,000 retirement plan administrators in the U.S. Of those, 17 percent are aware that they are the fiduciary and 83 percent are not.
The problem with not knowing that you are the fiduciary of your company’s retirement plan is that you have unknowingly put your personal assets at risk. A fiduciary assumes personal liability for the responsibilities for administering the plan correctly.
A February 2008 Supreme Court ruling states: ‘Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.’
The word ‘personal’ means just that, and there is no corporate veil in place to protect you. So, in essence, you have pledged your home. That is the dirty little secret to this deal. And ignorance is no defense in a court of law.
The responsibilities and duties of a fiduciary, among other things, include making sure that the plan is paying out only reasonable plan expenses to a service provider.

How are reasonable plan expenses defined?

The benchmark number for a plan of        100 participants with $2 million in assets is 1.32 percent. If the service provider fee is, say, 2.5 percent, the fiduciary must document and report this.
This may not seem like a lot of money, but when you consider that there are 72 million Americans in 401(k) plans, and if everyone is overpaying fees by 1 percent for 25 years, compounded, you can see that it can be very lucrative for service providers.
If a company’s plan administrator has not documented this information, he or she may be liable for those extra fees; one estimate is that this can be as high as $75,000 per employee over the life of a 401(k). Estimates are that $2.3 trillion will be put back into employees’ 401(k) as a result of this new regulation. That money must be paid back to the employee’s retirement fund. If the company’s plan administrator is also the fiduciary, that money will come out of the administrator’s own personal assets.

What can plan administrators do before July 1 to protect themselves?

First, consult with your company’s attorney to find out if you are the fiduciary of your company’s 401(k) plan. Second, get a fiduciary liability policy before the rule goes into effect July 1. These plans are typically not expensive and can cover all individuals, trustees and board members who act as fiduciaries of the company’s retirement plan.
Finally, get a new administrator for your plan that has low fees and accepts fiduciary responsibilities.

What are some key dates for the new regulation?

July 1 is the date that the service provider must disclose its fees and compensation to clients and to explain whether it is the plan’s fiduciary. These meetings between service providers and a company’s plan administrator are already taking place all over the country.
On Aug. 30, the company’s fiduciary must issue a report on a monthly basis to each of its employees about how much the service provider is taking out of each 401(k) each month in fees and other compensation. If an employee complains about this fee to the Department of Labor and asks for an audit, the fiduciary must comply and present reports about these fees for the entire life of the 401(k). And these monies will have to be put back in. And if you are the fiduciary and do not have fiduciary insurance, those funds will be taken out of your personal assets.

Charles Bernier is president of ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 or [email protected]

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